Title 22 of the Code of Federal Regulations, Section 226.21(b)(6), requires that USAID’s contractors and grantees have effective internal controls to ensure that disbursements are reasonable, allocable, and allowable under the agreements. Implementing partners are also required to maintain financial records, supporting documents, statistical records, and all other records pertinent to the award to sufficiently substantiate charges to their awards.

During the review, the Office of Inspector General observed a number of best practices and internal control measures. These best practices, which could help other contractors and grantees strengthen their cash management practices and reduce risk exposure, are described below.

Establishing and Maintaining a Cash Fund. All of the selected implementing partners had set up formal cash funds denominated in U.S. dollars or the local currency. We observed two types of cash funds: revolving and nonrevolving.

Under a revolving fund, a fixed cash balance was established, and as the funds were spent, the cash was replenished up to the level of the fixed cash balance.

Under the nonrevolving type fund, the cash balance was based on periodic expense forecasts, usually done monthly. When the funds were spent, the cash replenishment was based on the next period’s expense forecast.

When they withdrew cash from the bank to replenish the funds, most of the selected implementing partners maintained a low profile for their security. One grantee used hawala to transport money from the bank to its office, thereby eliminating any risk associated with its staff traveling back from the bank with large sums of cash.

Designating a Cashier and an Alternate. All of the selected implementing partners formally designated a qualified cashier and an alternate to manage and disburse cash. These individuals were entrusted with the safekeeping of all cash. The following are basic functions of a cashier:

Making payments and obtaining receipts for goods and services, such as small purchases, travel advances, etc.

Making other cash payments as necessary for operations under the contract/agreement

Some implementing partners provided formal training to their cashiers on cash management practices by sending them abroad, but most provided on-the-job training. All partners regularly provided sessions on rules of ethical behavior.

Supporting Documentation for Cash Disbursements. We performed surprise counts of all selected implementing partners’ cash funds and reviewed a judgmental sample of cash payments and supporting documents. We observed that all of the implementing partners required receipts or some form of support for each cash payment regardless of the amount. Such supporting documentation included approved cash requests, original receipts, approved vouchers, sales slips, cash register tickets, and invoices for purchases (or an equivalent receipt itemizing supplies or services purchased).

Several of the selected implementing partners had exceptionally well-organized filing systems, using labeled binders that were stored in secured cabinets to file authorizations and liquidations of cash advances, payment vouchers, and supporting documentation. Most of the selected implementing partners electronically scanned their financial documentation and sent the originals to their home offices in the United States. Electronic copies were kept in the field for audit and reference purposes.

Surprise Cash Counts. All the chiefs of party or finance managers performed surprise cash counts regularly. Surprise cash counts serve as an excellent deterrent against fraud and the possibility of cashiers giving out unauthorized short-term cash loans to employees or friends.

Supervisory Review of Cash Disbursements. All of the selected implementing partners implemented internal control procedures that included supervisory review of cash disbursements. Some supervisors were more involved than others in reviewing cash payment vouchers. For two of the selected implementing partners, both the chief of party and the finance manager reviewed and approved each voucher before a cashier could make a cash payment. Supervisory review over cash disbursements is a standard internal control that is intended to provide the last line of defense to ensure that such disbursements are reasonable, allocable, and allowable under the agreements.

Performing Cost Analysis of Goods and Services. By most accounts, corruption and fraud are widespread in [the country]. As a countermeasure, as part of their procurement and payment process for local goods and services, all of the selected implementing partners implemented procedures to determine fair market prices to detect inflated costs and fraudulent activity.

Some of the implementing partners sent out their staff as “secret shoppers” to verify prices before making a procurement or payment. Partners also trained their financial staff to be vigilant when reviewing receipts and invoices, to look for irregularities and indicators of possible fraud such as inflated prices, forged receipts, and duplicate invoices. Several partners had terminated local vendors or subcontractors for inflating the cost of their goods and services.

Written Policies and Procedures for Cash Operations. All of the selected implementing partners had either written policies or procedures for their cash operations or followed corporate policies and procedures. Written policies and procedures help ensure that management directives are carried out and employees understand their roles and responsibilities.

Proactively Searching for Ways to Reduce Cash Exposure. Five of the ten selected implementing partners reduced their cash exposure by continuously seeking ways to minimize cash transactions. For example, they worked with local vendors and subcontractors who had bank accounts and paid them through EFT or check. Some of the implementing partners refused to issue subcontracts to companies who did not have bank accounts. Partners also required employees to have bank accounts so that their salaries could be paid through direct deposit. Finally, partners paid taxes to the Ministry of Finance using EFT. This has proven to be a fast and efficient mechanism for remitting and tracking tax payments sent to the Government, as well as a way to reduce the risk of fraud with tax remittances.

The importance of proactively reducing the number of cash transactions is illustrated by a 2010 OIG fraud case concerning tax payments. An employee working for a USAID/Afghanistan contractor embezzled about $129,495 in cash and falsified receipts to make it appear that the cash payments were received by the Ministry of Finance. If the tax payments had been made through EFT, this instance of fraud would have been prevented.

General Recommendations

Disseminate the best practices described above to implementing partners to minimize cash transactions.

This information is derived from audit reports of the Office of the Inspector General. The source refers to the audit report, which is available on this site as part of the Audit Database Project: an educational tool for compliance with USAID regulations. Please see the disclaimer of this site before using this information.